On January 13, 1977, petitioners filed a motion for partial summary judgment in which they requested this Court to rule "that Petitioner Charles Ray Considine's conviction under Section 7206(1) for the taxable year 1969 for wilfully making and subscribing a false or fraudulent return is not admissible evidence to prove underpayment of a
In the amendment to answer respondent alleged that petitioner Charles Ray Considine was collaterally estopped by his conviction under section 7206(1) for willfully and knowingly making and subscribing a false income tax return for the year 1969 to deny that his 1969 return was fraudulent and that he received capital gains properly reportable by him in 1969 which he did not report on his 1969 return.
Petitioners contend that collateral estoppel is not applicable in a case involving an addition to tax under section 6653(b)
The first reason assigned by petitioners is that under section 6653(b) a necessary part of respondent's proof is that there was in fact an underpayment of tax in 1969 which was due to fraud, whereas under section 7206(1) there is no
Petitioners' second position is that Mr. Considine is not collaterally estopped from establishing that there was in fact no "disposition" of the note and trust deed by conviction under the charge in the indictment that he "did not believe the return to be true and correct in that he reported net longterm capital gains of $3,446, whereas, as he then and there well knew, he was required to report additional capital gains in the amount of $98,357.87 received on the assignment of the note and trust deed." Petitioners argue from this position that Mr. Considine is not estopped from showing that there is no addition to tax under section 6653(b) because of a gain on the disposition of such note and trust deed. Petitioners in this argument apparently contend that a necessary part of the proof for conviction under section 7206(1) was not that in fact Mr. Considine received a capital gain in 1969 but rather his belief in this respect at the time the return was filed.
The third position taken by petitioners is that since petitioner Thalia K. Considine, who was not a defendant in the criminal case, is, by respondent's concession,
Petitioners in support of their position rely primarily on United States v. Anderson, 254 F.Supp. 177 (W.D. Ark. 1966). That case involved a question of the extent to which the
The court is of the opinion that the material facts necessary to be proven to obtain a conviction in the instant case would not be sufficient to estop the defendant from contesting a claim made by the Government for the recovery of a fraud penalty.
In support of this conclusion the court in the Anderson case quoted from the holding in Gaunt v. United States, 184 F.2d 284 (1st Cir. 1950), with respect to the necessary elements of proof for conviction under section 145(c), I.R.C. 1939, which contained substantially the same provisions as section 7206(1) of the 1954 Code. In Gaunt v. United States, supra at 288, the court stated in this regard:
It seems to us clear that the latter subsection makes it a felony merely to make and subscribe a tax return without believing it to be true and correct as to every material matter, whether or not the purpose in so doing was to evade or defeat the payment of taxes. That is to say, it seems to us that the subsection's purpose is to impose the penalties for perjury upon those who wilfully falsify their returns regardless of the tax consequences of the falsehood. Whereas subsection 145(b) condemns as felonious wilful attempts to evade or defeat taxes "in any manner," and one manner, certainly, is by the wilful filing of a return known to be false in some material respect.
In Hartman v. United States, 245 F.2d 349 (8th Cir. 1957), the above statement from the Gaunt case was quoted with approval. See also United States v. Raynor, 204 F.Supp. 486 (S.D. Cal. 1962), denying the defendant's motion to dismiss an information charging violation of section 7206(1) even though a bill of particulars disclosed that a proper computation of his taxable income for the year involved resulted in an overpayment rather than an underpayment of tax.
Petitioners' counsel in his argument pointed out that in the criminal case for violation of section 7206(1) Mr. Considine had attempted to get certain information under a bill of particulars and that the information had been denied by the Court on the theory that a necessary element of proof under section 7206(1) was not that there was any tax due and owing as a result of the willful subscribing of a false return.
Respondent, in reply to petitioner's reliance on United States v. Anderson, supra, points out that it is not his contention that petitioner is collaterally estopped to deny that there was any underpayment of tax in 1969 since an underpayment of tax was not a necessary element of proof under section 7206(1), but that it is his position that petitioner is collaterally estopped to deny that he willfully made and subscribed to a return in 1969 which he did not believe to be true and correct and that he knew at the time he subscribed to this return that he was required to report capital gains of $98,357.87 received in that year on the assignment of a note and trust deed. It is respondent's position that a conviction of a taxpayer for willfully subscribing to a return which he knows not to be correct collaterally estops that taxpayer from denying that his return for that year is false and fraudulent and that, where the conviction is based on the omission of a specific item of income which the taxpayer is held to have known that he was required to report, it collaterally estops that taxpayer from denying that he did in fact have income in that amount which was not reported. Respondent then states
Respondent points out that under the holdings of the Supreme Court in United States v. Bishop, 412 U.S. 346 (1973), and United States v. Pomponio, 429 U.S. 10 (1976), the term "willfully" as used in sections 7201, 7202, 7203, 7204, 7205, and 7206 has the same meaning. In these cases the Supreme Court defines the meaning of "willfully" as used in these statutes to be simply "a voluntary intentional violation of a known legal duty." Respondent then points to our statement in Amos v. Commissioner, 43 T.C. at 55, that "the term `willfully' as used in section 7201 has authoritatively been defined in prior judicial decisions to encompass all the elements of fraud which are envisioned by the civil penalty described in section 6653(b)."
In the Amos case we held that a taxpayer's conviction for willful evasion of income taxes in violation of section 7201 necessarily carries with it the ultimate factual determination that part of the deficiencies in the years to which the conviction relates was due to fraud within the meaning of section 6653(b). We there pointed out that the Commissioner of Internal Revenue, the respondent in the civil case, is a party in privity with the United States of America and that where the petitioner in the case before us is the same person as the defendant in the criminal case, the necessary requirement of identity of parties has been met. We then proceeded to analyze the ultimate fact necessary to show criminal evasion of income taxes under section 7201 and the ultimate fact necessary to show that a part of the underpayment of tax was due to fraud under section 6653(b). We concluded that the ultimate facts required to be established under the two sections were identical, and therefore where a taxpayer had been convicted under section 7201 of tax evasion, he was
Since as the Supreme Court has held "willfully" as used in sections 7201 and 7206 has the same meaning, the basic distinction in the Amos case and the instant case is that for a conviction under section 7206(1) it is not necessary for the United States to establish that the willful making and subscribing of a return that the defendant does not believe to be true results in an underpayment of tax whereas a conviction can be obtained under section 7201 only by a showing that there was in fact an underpayment of tax. Because a conviction can be had under section 7206(1) without proof of an underpayment of tax, such a conviction does not, as does a conviction under section 7201, encompass every aspect required to establish an addition to tax for fraud under section 6653(b). Our question here, therefore, is whether a person convicted of a crime that does not require as an element essential to the judgment proof of every fact necessary to show an addition to tax under section 6653(b) should be collaterally estopped to deny in a case involving section 6653(b) those facts which are necessary both to the judgment in the criminal case and to sustain the addition to tax under section 6653(b).
In order to decide the question here presented it is necessary to analyze the elements of proof which are necessary both to a judgment of conviction under section 7206(1) and to liability for the addition to tax for fraud under section 6653(b) to determine if the identity is sufficient to cause collateral estoppel to apply within the holding of Sunnen v. Commissioner, 333 U.S. 591 (1948), and cases following the Sunnen case.
In order to show under section 7206(1) that a taxpayer "willfully makes a return which he does not believe to be true and correct as to every material matter" it is necessary to establish that the return as filed is not correct in a material respect, that the taxpayer at the time he filed the return did not believe it to be correct in every material respect, and that he subscribed to the return with the intent to violate "a known legal duty." In our view the establishment of these facts also establishes that the return as filed is a fraudulent
"Willfully" within the purview of section 7201, comprehends a specific intent involving the bad purpose and evil motive to evade or defeat the payment of tax. United States v. Murdock, 290 U.S. 389 (1933); Spies v. United States, 317 U.S. 492 (1943); Bloch v. United States, 221 F.2d 786 (C.A. 9, 1955). Thus, one who "willfully attempts * * * to evade * * * tax" within the meaning of the criminal sanction does so with the requisite fraudulent intent for the purpose of the civil sanction, since "the intent required [to bring into application the civil penalty] is the specific purpose to evade." Mitchell v. Commissioner, 118 F.2d 308 (C.A. 5, 1941). * * *
Having concluded that a conviction under section 7206(1) for "willfully" making a return which the taxpayer does not believe to be true and correct is proof that the return is fraudulent, we must consider whether it was necessary to the conviction of Mr. Considine under section 7206(1) to establish that he received capital gains of $98,357.87 in 1969 which he did not report. As was stated in Commissioner v. Sunnen, supra at 601, "where a question of fact essential to the judgment is actually litigated and determined in the first tax proceeding, the parties are bound by that determination in a subsequent proceeding even though the cause of action is different." As heretofore pointed out, it is not essential to the judgment of conviction under section 7206(1) that there be an underpayment of tax. It is essential that the return be incorrect in a material matter. Since the only allegation of incorrectness in Mr. Considine's 1969 return in the criminal
The crucial question is whether the facts upon which the Government relies were in fact decided and were essential to the judgment in the prior case. The requirements for collateral estoppel are set forth in 1B Moore's Federal Practice Para. 0.443:
"The issue to be concluded must be the same as that involved in the prior action. In the prior action, the issue must have been raised and litigated, and actually adjudged. The issue must have been material and relevant to the disposition of the prior action. The determination made of the issue in the prior action must have been necessary and essential to the resulting judgment. (Emphasis added)."
The offense charged in the 1971 action involved conspiracy to use facilities of interstate commerce to carry on illegal bingo games. Appellant admits that the fact of the Berger payments was material and relevant in deciding whether appellant was engaged in the alleged conspiracy, but argues that the specific amounts of the Berger payments were not essential and that proof of those amounts was not subject to the doctrine of collateral estoppel.
We agree. The amounts of the Berger payments were not significant in the prior action. Only the fact that appellant was receiving protection money from Berger with respect to the illegal bingo operations was necessary to establish appellant's involvement in the conspiracy.
The holding of the court in the Colacurcio case is in accord with the statement in the Sunnen case that when the second case is on a different cause of action "the prior judgment acts as a collateral estoppel only as to those matters in the second proceeding which were actually presented and determined in the first suit." A matter which was not essential to the judgment in the first suit was not "determined in that suit."
In United States v. Considine, an unreported case (S.D. Cal. 1973, 34 AFTR 2d 74-5412, 74-2 USTC par. 9639), affd. in an unreported opinion (9th Cir. 1973, 74-2 USTC par. 9846), cert. denied 416 U.S. 970 (1974), in which the defendant was the same person as one of the petitioners in the instant case, the court made the following findings with respect to 1969:
In 1969 defendant assigned to the judgment creditor the Capri trust deed and note in partial satisfaction of the malpractice judgment. The assignment was for the then face value of $225,000.
Defendant reported the San Felipe sale on his 1965 tax return as an installment sale. No principal payments were received by defendant or his wife prior to their assignment of the note and trust deed in 1969 in satisfaction of the outstanding judgment. The assignment was recorded January 20, 1969.
The defendant's testimony that he believed that he was insolvent immediately before and immediately after the assignment of the Capri trust deed and note in 1969, and, therefore, in his belief, was not required to report the gain realized upon the assignment is not persuasive or credible.
The defendant having assigned in 1969 the Capri trust deed and note for face value of $225,000 in partial satisfaction of the malpractice judgment realized income therefrom and was required in 1969 to report capital gains in the amount of $98,357.87. The defendant knowingly did not report, in any manner, income received on the assignment of said note and trust deed.
Defendant willfully made and subscribed his 1969 tax return which contains his written declaration that it is made under penalty of perjury. He did not believe the return to be true and correct in that he reported net long term capital gains of $3,446, whereas, as he then and there well knew, he was required to report additional capital gains in the amount of $98,357.87 received on the assignment of the note and trust deed making the required reportable net long term capital gain $101,803.87.
The Circuit Court of Appeals, in affirming the District Court, stated in part:
Nor do we find convincing Considine's argument that there was no proof beyond a reasonable doubt that in 1969 he had an acceleration of gain from the disposition of an installment obligation (the $225,000 San Felipe note). The record amply supports the district court's finding that the settlement of the Norris judgment in which the judgment creditor accepted that note occurred in 1969 and that the fair market value of the note was its face amount as reduced because of acreage variation. The settlement could not be closed till March, 1969 after the bank which acted as escrow agent for the parties loaned Considine the cash required in addition to the $225,000 note to meet the settlement terms.
In our view, the case of United States v. Considine, supra, decided by the District Court settled the fact that Mr. Considine did receive capital gains in 1969 which he fraudulently failed to report in his return for that year. In our view, the fact that the omission of the capital gains item was a fraudulent omission was an essential element of the judgment in the criminal case.
Since in our view essential elements of the judgment of conviction of Mr. Considine under section 7206(1) were that his 1969 return was false and fraudulent in that it omitted capital gain received from the assignment of the note and trust deed, we must determine whether these facts are ultimate facts with respect to which an identical issue is presented under section 6653(b). The case of United States v. Fabric Garment Co., 366 F.2d 530 (2d Cir. 1966), cited in the Colacurcio case involved a situation similar to that here
In the present action for conversion, the Government moved for summary judgment on the grounds that many of the critical issues had been conclusively determined against the defendants in the criminal action. After careful analysis, the trial court denied the motion in part and granted it in part. It held that the 18 U.S.C. sec. 641 conviction did not conclusively determine that 19,000 yards of serge were converted by Fabric, Abrams, Mayflower and Berman, since the exact amount converted was not a necessary element of the criminal conviction and was not "`distinctly put on issue and directly determined' in the criminal prosecution." Emich Motors Corp. v. General Motors Corp., 340 U.S. 558, 569, 71 S.Ct. 408, 414, 95 L.Ed. 534 (1951). However, the court held that the sec. 641 conviction determined that Fabric, Mayflower, Abrams and Berman unlawfully, willfully, and knowingly sold, conveyed and disposed of wool serge made under contract for the Government. The court also held that the sec. 1001 convictions determined that Fabric and Abrams unlawfully, willfully and knowingly made materially false and fraudulent statements as to the amounts of inventory on hand under certain contracts and as to whether they had returned as jackets or as scrap all the material furnished to them by the Government.
* * *
Under federal law, a prior criminal conviction will work an estoppel in favor of the Government in a subsequent civil proceeding with respect to "questions `distinctly put in issue and directly determined' in the criminal prosecution. * * * In the case of a criminal conviction based on a jury verdict of guilty, issues which were essential to the verdict must be regarded as having been determined by the judgment." Emich Motors Corp. v. General Motors Corp., 340 U.S. 558, 569, 71 S.Ct. 408, 414, 95 L.Ed 534 (1951); see Local 167, Int'l Bhd. of Teamsters etc. v. United States, 291 U.S. 293, 298, 54 S.Ct. 396, 78 L.Ed. 804 (1934). The trial court, after the careful examination of the record as required by Emich, correctly determined the collateral estoppel consequences of the previous convictions.
In our view the holding in the Fabric Garment Co. case is applicable to a tax case under a proper interpretation of Commissioner v. Sunnen, supra. We interpret the Sunnen case as holding that a prior judgment is conclusive as to facts
Petitioners' second point, that the doctrine of collateral estoppel should not apply in this case since the addition to tax for fraud in the present case rests on the "disposition" in the year 1969 of the note and mortgage, is without merit. In United States v. Considine, supra, as heretofore pointed out, the court specifically found that Mr. Considine assigned the
Petitioners' final position that collateral estoppel should not apply to Mr. Considine since it does not apply to Mrs. Considine is without merit. This Court has previously considered the issue of a husband and wife filing a joint return and a joint petition in this Court where only the husband was involved in a criminal prosecution. In Rodney v. Commissioner, 53 T.C. 287, 307 (1969), we pointed out that it had long been recognized by this Court that the husband and wife who file a joint return and joint petition are separate taxpayers and that the record must form a basis for entry of decision as to each. We concluded that a wife who files a joint return with her husband is not a party privy to her husband in litigation before this Court. In that case we stated that even though the taxpayer-husband was estopped by his prior conviction from litigating his civil liability for the addition to tax for fraud, his wife, the other petitioner in the case, was not estopped. This of course inherently carries with it a requirement as pointed out in the Rodney case that the respondent establish the husband's fraud if he is to have the wife held for the addition to tax for fraud. Therefore, neither Mrs. Considine nor respondent will be barred from introducing any proper evidence with respect to the transaction regarding the assignment of the note and mortgage and the extent to which income resulted therefrom or whether the addition to tax for fraud under section 6653(b) with respect to Mrs. Considine for the year 1969 is proper. Since the decision in the Rodney case there have been a number of cases before this Court of joint returns and joint petitions in which we have held the spouse who was convicted in a criminal proceeding involving the same issue as in the civil proceeding
We conclude that respondent has properly raised the issue of collateral estoppel. Based on accepting the allegations in respondent's amendment to answer as to the prior conviction of Mr. Considine under section 7206(1) as proven facts, we hold that petitioner Mr. Considine is collaterally estopped to deny that he willfully filed a false and fraudulent return for the year 1969 omitting capital gains which he received in that year from a note and trust deed. This holding does not relieve respondent from being required to prove that there was an underpayment of tax by Mr. Considine in 1969 in order to prove that Mr. Considine is liable for the addition to tax for fraud in that year.
Petitioners' motion for summary judgment will be denied.
An appropriate order will be entered.
8. FURTHER ANSWERING the petition and in support of the determination that a part of the underpayment of tax required to be shown on the income tax return of the petitioner Charles Ray Considine for the taxable year 1969 is due to fraud by petitioner Charles Ray Considine, the respondent affirmatively relies upon the doctrine of collateral estoppel (estoppel by judgment) and alleges:
(a) Charles Ray Considine, petitioner herein, is the same person who was the defendant in the criminal case of U.S. v. Charles Ray Considine, (United States District Court for the Southern District of California, Criminal Docket No. 13170) 74-2 U.S.T.C. par. 9639 (1973) and affirmed by the 9th Circuit on November 21, 1973, cited at 74-2 U.S.T.C. par. 9846 (1973). Certiorari to the Supreme Court denied in 416 U.S. 970 (1974). The judgment entered in this case is final.
(b) The respondent herein is a party in privity with the United States of America, the prosecuting party in the aforesaid case in which petitioner Charles Ray Considine herein was the defendant.
(c) Count 4 of the indictment filed in said criminal case, as set forth in the United States District Court's Findings of Fact and Conclusions of Law, paragraphs 14 and 15, sets forth the following charge against the defendant Charles Ray Considine, the petitioner herein:
"14. The defendant having assigned in 1969 the Capri trust deed and note for face value of $225,000 in partial satisfaction of the malpractice judgment realized income therefrom and was required in 1969 to report capital gains in the amount of $98,357.87. The defendant knowingly did not report, in any manner, income received on the assignment of said note and trust deed.
"15. Defendant willfully made and subscribed his 1969 tax return which contains his written declaration that it is made under penalty of perjury. He did not believe the return to be true and correct in that he reported net long term capital gains of $3,446, whereas, as he then and there well knew, he was required to report additional capital gains in the amount of $98,357.87 received on the assignment of the note and trust deed making the required reportable net long term capital gain $101,803.87."
(d) A finding of fact that the petitioner Charles Ray Considine did willfully file a false joint income tax return for the taxable year 1969 was essential to support the finding by the Court that the defendant Charles Ray Considine was guilty as charged of the aforementioned count of the indictment.
(e) One of the issues in the instant case is whether the addition to tax imposed by Code sec. 6653(b) should be imposed against the petitioner for the taxable year 1969.
(f) Said issue in the instant case is the same as the issue which was presented and determined adversely to the petitioner in the aforesaid criminal case to the extent that a conviction on the charge contained in the District Court's Findings of Fact and Conclusions of Law set forth above is dependent upon a finding that petitioner did willfully and knowingly make and subscribe an income tax return for the taxable year 1969, which said income tax return he did not believe to be true and correct as to every material matter.
(g) The prior criminal conviction of the petitioner Charles Ray Considine under Code sec. 7206(1) for the taxable year 1969 is conclusive and binding on the petitioner. By reason thereof, the petitioner is estopped in the instant case under the doctrine of collateral estoppel (estoppel by judgment) from denying herein that he did willfully and knowingly make and subscribe a false federal income tax return for the taxable year 1969 and that he knew and believed that the items described in paragraphs 14 and 15 of the District Court's Findings of Fact and Conclusions of Law set forth above, and which are the basis for the allegations of fraud set forth in paragraphs 7(a)-(p) of Respondent's Answer in this case, were reportable as capital gains in 1969.
9. THE RESPONDENT, for further amendment to the answer filed in this case, adds the following paragraph after paragraph 3 of the prayer contained in the answer:
4. That the Court determine the petitioner Charles Ray Considine is estopped under the Doctrine of collateral estoppel (estoppel by judgment) from denying that he willfully and knowingly made and subscribed a false and fraudulent income tax return for the taxable year 1969 and that he knew and believed that the capital gains received in 1969 as set forth in paragraph 8(c) above were reportable by him in that year.
(b) FRAUD. — If any part of any underpayment (as defined in subsection (c)) of tax required to be shown on a return is due to fraud, there shall be added to the tax an amount equal to 50 percent of the underpayment. In the case of income taxes and gift taxes, this amount shall be in lieu of any amount determined under subsection (a). In the case of a joint return under section 6013, this subsection shall not apply with respect to the tax of a spouse unless some part of the underpayment is due to the fraud of such spouse.
Any person who —
Any person who willfully attempts in any manner to evade or defeat any tax imposed by this title or the payment thereof shall, in addition to other penalties provided by law, be guilty of a felony and, upon conviction thereof, shall be fined not more than $10,000, or imprisoned not more than 5 years, or both, together with the costs of prosecution.